Bonds and the Upsides/Downsides of Interest Rate Changes

Scope Of This Post

One discussion I keep having with people centers around the hypothetical scenario of a person buying bonds and then interest rates change.  In particular, people seem to be worried about buying bonds and then interest rates increase (especially an unexpected increase since expected increases are supposedly already priced into bonds).

My assertion is that although an investor would have benefited from delaying purchase of bonds until after the (unexpected) increase in interest rates, an investor holding pre-existing bonds is not necessarily worse off when interest rates increase.

For most of my post, I will be talking about interest rates changing but inflation staying constant.  Also, the characters in my stories like to buy 3-year bonds and only 3-year bonds.  So, when my story involves "interest rates changing from 5% to 6.9%", I'm specifically talking about the interest rates for 3-year bonds only.  I know the world has more than 3-year bonds, but I'm keeping my stories short and simple.

I will also ignore callable bonds, TIPS, taxes, convexity, and default risk; I believe those concepts do not change the conclusions about the benefits/harms of interest rate changes on bond holders.

I welcome comments and especially corrections to the assertions I make in this post.